Florida Office of Insurance Regulation
REVIEW OF FLORIDA
SINKHOLE INSURANCE
PROPOSAL
_________________________________
Calculation of Section 40
“Presumed Factor”
September 1, 2006
Deloitte Consulting LLP
CityPlace I, 33rd Floor
185 Asylum Street
Hartford, CT 06103-3402
USA
Tel: 860-725-3000
Fax: 860-725-3350
www.deloitte.com
September 1, 2006
Mr. Michael Milnes
Contract Manager and Deputy Director
Office of Insurance Regulation
J. Edwin Larson Building
200 East Gaines Street, Suite 121
Tallahassee, FL 32399-0326
Dear Mr. Milnes:
We are pleased to submit our actuarial review of the impact to rates made by the provisions of
Chapter Law 2006-12 (SB 1980) related to sinkhole losses and Sections 17, 18, 19, 20, and 21 of
Chapter Law 2005-11, and our calculation of Section 40’s “Presumed Factor”.
It was a pleasure working with you and we look forward to serving the Office of Insurance
Regulation in the future. Please do not hesitate to call either Jan at (860) 725-3050, Kevin at
(860) 725-3056 or Rich at (305) 371-2600 if we can be of any further assistance.
Sincerely,
Jan Lommele, FCAS, MAAA, FCA
Principal – Deloitte Consulting LLP
Kevin Bingham, ACAS, MAAA
Senior Manager – Deloitte Consulting LLP
Richard Simring, Attorney at Law
Partner – Jorden Burt LLP
Greg Chrin, ACAS, MAAA
Manager – Deloitte Consulting LLP
I\U\S\BINGHAM
Member of
Deloitte Touche Tohmatsu
PRESUMED FACTOR
TABLE OF CONTENTS
Page
I. Executive Summary .......................................................................................1
Purpose and Scope ..............................................................................1
Background .........................................................................................2
Distribution and Use .........................................................................10
Reliance and Limitations ..................................................................10
Presumed Factor Findings ................................................................12
II. Presumed Factor by Section .......................................................................13
Chapter Law 2005-111
Section 17 – Sinkhole Insurance; Definitions...................................14
Section 18 – Database of Information Relating to Sinkholes...........15
Section 19 – Standards for Investigation ..........................................16
Section 20 – Testing Standards for Sinkholes ..................................19
Section 21 – Sinkhole Reports..........................................................19
Chapter Law 2006-12
Section 25 – Sinkhole Insurance; Definitions...................................21
Section 26 – Standards for Investigation ..........................................22
Section 27 – Testing Standards for Sinkholes ..................................23
Section 28 – Sinkhole Reports..........................................................23
Section 29 – Alternative Procedure for Resolution ..........................25
III. Presumed Factor Summary Matrix ............................................................36
IV. Observations ..............................................................................................37
V. Appendix.....................................................................................................46
A. Homeowners Insurance 101........................................................47
B. Florida County Map and “Sinkhole Alley” Counties .................48
C. OIR Market Share Reports..........................................................51
PRESUMED FACTOR
I. EXECUTIVE SUMMARY
PURPOSE AND SCOPE
Deloitte Consulting LLP (Deloitte Consulting) has been retained by the Florida Office of
Insurance Regulation (OIR) to evaluate the impact of recent legislative reforms on sinkhole
insurance in Florida and recommend a presumed factor.
Section 40 of the bill states:
(1) By September 1, 2006, the Office of Insurance Regulation shall calculate a presumed
factor to reflect the impact to rates of the changes made by the provisions of this act
related to insurance claims for sinkhole losses and by Sections 17, 18, 19, 20, and 21 of
chapter 2005-111, Laws of Florida.
(2) In determining the presumed factor, the OIR shall use generally accepted actuarial
techniques and standards in determining the expected impact on losses, expenses, and
investment income of the insurer.
(3) The OIR may contract with an appropriate vendor to determine the presumed factor.
(4) Each residential property insurer shall, at its next rate filing after October 1, 2006, reflect
a rate change that takes into account the presumed factor determined under subsection
(1).
In accordance with the contract signed on July 11, 2006, Deloitte Consulting has been asked by
the OIR to analyze the provisions of Chapter Law 2006-12 (SB 1980) related to sinkhole losses
and Sections 17, 18, 19, 20, and 21 of Chapter Law 2005-11and provide a presumed factor
impact, by Section, expressed in the form of a one decimal place percentage adjustment to base
rates. Where a Section has no rate impact, Deloitte Consulting discloses it.
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PRESUMED FACTOR
BACKGROUND
Since 1981, Florida insurers offering property coverage to homeowners have been required by
law to offer coverage for damage resulting from sinkholes for:
•
Covered structures
•
Stabilizing the ground beneath covered structures1
A sinkhole is defined in Florida law (Section 627.706, F.S., 2005) as a landform created by
subsidence of soil, sediment, or rock as underlying strata are dissolved by ground water. A
sinkhole may form by collapse into subterranean voids created by dissolution of limestone or
dolostone or by subsidence as the strata are dissolved.
Sinkholes are a naturally occurring phenomenon as rain and groundwater flow through the top
layer of soil into the limestone and dolomite layers that underlie most of Florida. Although
sinkholes do occur naturally, sinkholes occur more frequently due to human interaction with the
state’s natural environment (e.g., excessive ground water pumping by farmers, construction
practices, diverting surface water, etc.).
In situations where sinkhole claims are denied by insurance companies, reasons include settling,
decay, compression of organic debris, soil settlement, clay shrinkage, septic tank collapse, sewer
pipe damage, no damage to structure and upheaval of structure by trees. According to the
Florida State University Report titled “Insurance Study of Sinkholes”, the first five reasons
account for 80 percent of insurance company denials. In situations where sinkhole claims are
approved, remediation often requires the use of two procedures, compaction grouting,
bridging/underpinning, or a combination of the two procedures.
For further background information on the history of Florida’s sinkhole crisis, please refer to the
April 2005 Florida State University report titled “Insurance Study of Sinkholes” prepared at the
1
House of Representatives Staff Analysis on SB286, Summary Analysis.
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PRESUMED FACTOR
request of the 2004 Florida Legislature. This report can be downloaded at
http://www.floir.com/LegislativeAffairs/2005_reports_studies.htm.
“Sinkhole Alley” Counties
Although the new sinkhole legislation applies to the state as a whole, the majority of sinkhole
related claims are generated in Pasco, Hernando, Pinellas, and Hillsborough counties near
Tampa, often referred to as “Sinkhole Alley”.2 As is noted in the House of Representatives Staff
Analysis.
As will be discussed below in Section 29; if the insurer agrees in writing with the neutral
evaluator’s assessment and timely complies with the recommendations, the insurer is no longer
liable for extra-contractual damages related to the sinkhole loss with respect to the issues
determined by the neutral evaluation process. However, we note that it is the position of
Citizens that it is exempt from bad faith liability due to the language of section 627.351(6)(i),
which is part of its enabling statute. If Citizens is, in fact, exempted from bad faith liability
under its enabling statute, then the changes to Section 29 eliminating bad faith liabilities under
certain circumstances would have no impact on Citizens. Given the number of policies that have
moved from other insurance companies to Citizens, the savings to insurance companies from this
change would likely be minimal. Unfortunately, we were unable to obtain credible information
on the percentage of sinkhole claim payments resulting from bad faith allegations made by
policyholders. The counties in the west central portion of the state are particularly prone to
sinkhole formation and collapse because the limestone in that area is closer to the surface, thus
making the rock layer beneath the surface more vulnerable to erosion.
In the data provided to Deloitte Consulting by Citizens Property Insurance Corporation
(Citizens), 95 percent of all sinkhole claims and 98 percent of all sinkhole loss and loss
2
Please refer to Appendix B for Florida county map and expanded maps of Pasco, Hernando, Pinellas and
Hillsborough counties. Please refer to Appendix C for insurance company market share information.
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PRESUMED FACTOR
adjustment expense (LAE) dollars, from January 1, 2004 through July 31, 2006, have been
reported in these four counties.3,4
Citizens’ sinkhole loss experience has deteriorated from 9 claims reported in 2002 for just under
$300,000 to 632 claims reported in 2005 for $86.2 million. Through July 31, 2006, there have
been 432 claims reported totaling $73.5 million in reported loss and LAE. Extrapolating those
amounts out to year end 2006, we estimate that Citizens would handle around 740 claims
amounting to approximately $125 million in loss and LAE payments.
Tables 1a and 1b show the percentage of claims reported by county in Sinkhole Alley and the
rest of Florida in total for all claims reported to Citizens between January 1, 2004 and July 31,
2006.
3
Loss adjustment expenses include defense and cost containment (DCC ) and adjusting and other (AO). DCC
represents expenses such as surveillance expenses, fixed amounts for medical cost containment, litigation
management expenses, attorney fees incurred owing to a duty to defend, and fees/salaries for appraisers,
investigators, working on the defense of a claim. AO represent expenses such as fees and expenses of adjusters and
settling agents, fees/salaries for appraisers, investigators, if working in the capacity of an adjuster, and attorney fees
incurred in the determination of coverage, including litigation between an insurer and the policyholder. The
insurance industry changed it’s terminology in the late 90’s from allocated loss adjustment expense (ALAE) to DCC
and unallocated loss adjustment expense (ULAE) to AO, noting that the relationship was not one-to-one.
4
The company only provided aggregated data (i.e., no claim level detail was provided).
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PRESUMED FACTOR
Table 1a
Percentage of Reported Sinkhole Claims by County
Citizens data through 7/31/2006
100%
Percentage of Reported Claims
80%
60%
40%
20%
0%
2004
2005
2006*
2004-2006*
Year
Pasco
Hernando
Pinellas
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Hillsborough
Rest of Florida
PRESUMED FACTOR
Tables 2a and 2b show the percentage of loss and LAE reported by county in Sinkhole Alley and
the rest of Florida in total for all claims reported to Citizens between January 1, 2004 and July
31, 2006.
Percentage of Reported Sinkhole Loss and LAE by County
Citizens data through 7/31/2006
Table 2a
100%
Percentage of Reported Loss and LAE
80%
60%
40%
20%
0%
2004
2005
2006*
2004-2006*
Year
Pasco
Hernando
Pinellas
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Hillsborough
Rest of Florida
PRESUMED FACTOR
Table 3 shows the growth of the average reported loss and LAE per sinkhole claim reported to
Citizens since 2004 through July 31, 2006.
Table 3
($)
Average Reported Loss and LAE
Citizens Data Through 7/31/2006
200,000
40.0%
180,000
36.0%
160,000
32.0%
140,000
28.0%
120,000
24.0%
100,000
20.0%
80,000
16.0%
60,000
12.0%
40,000
8.0%
20,000
4.0%
-
0.0%
2004
2005
2006*
Year
Avg. Loss
Avg. LAE
Avg. Loss & LAE
LAE as a % of Loss
Table 4 shows State Farm’s incurred loss and allocated loss adjustment expense (ALAE)
sinkhole data through June 30, 2006 for years 2002 through 2006.5
5
The company only provided aggregated data (i.e., no claim level detail was provided).
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PRESUMED FACTOR
Table 4
Incurred Reported Loss and ALAE
State Farm Data Through 6/30/2006
60,000,000
40.0%
36.0%
50,000,000
32.0%
28.0%
40,000,000
($)
24.0%
30,000,000
20.0%
16.0%
20,000,000
12.0%
8.0%
10,000,000
4.0%
-
0.0%
2002
2003
2004
2005
2006*
Year
Inc. Loss
Inc. ALAE
Inc. Loss & ALAE
ALAE as a % of Loss
* - Data for 2006 has been annualized to a full year for illustration purposes
Through June 30, 2006, there has been $16.6 million in reported losses and $3.3 million in
ALAE. Extrapolating those amounts out to year end 2006, we estimate that State Farm would
handle claims amounting to approximately $40 million in loss and ALAE payments.
In addition, we have reviewed the State Farm data contained in the St. Petersburg Times article
published by Garrett Therolf on May 29, 2006 titled “Sinkhole Payouts Creating a Crisis?” This
data shows that State Farm is experiencing a sharp upward trend in sinkhole loss payments
similar to Citizens in “sinkhole alley”. State Farm sinkhole claims increased from just 6 claims
in 1994 to in excess of 400 claims in 2002, 2003 and 2004. State Farm paid out an estimated
$52 million in sinkhole claims in 2005. Although State Farm’s sinkhole loss payments appear to
have stabilized around the $50 million level since 2002, we are unable to determine from the
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PRESUMED FACTOR
article whether the stabilization is driven by reduced exposure as State Farm non-renews
policies. State Farm and other insurance companies have non-renewed policies in these counties
over the past few years, which is a contributing factor in the dramatic increase in Citizens’
sinkhole claim activity.
Citizens filed a rate change6 effective 11/1/2004 for new business (1/1/2005 for renewal
business) aimed at adjusting HO-3 rates in sinkhole prone territories to meet the actuarially
justified costs. The following adjustments were made:
Territory
County
% Change
736
Pasco, Remainder
73.5%
595
Pasco, Coastal
55.7%
733
Hernando, Remainder
52.6%
159
Hernando, Coastal
38,6%
692
Lake
33.1%
731
Citrus, Remainder
27.3%
Other sinkhole counties7
5.0%
Florida Total
3.7%
Citizens also added in this filing an underwriting rule declaring any property sustaining damage
and receiving payment for a sinkhole loss as uninsurable, unless the insured can certify that the
recommended repairs or other approved stabilization repairs were completed.
6
FL OIR filing reference number 04-09416 is available from the Office of Insurance Regulation I-File Workflow
System Forms & Rates Search Page web site (http://www.fldfs.com/edms).
7
Other sinkhole counties include: 591 Citrus, Coastal, 047 Hillsborough, Tampa, 080 Hillsborough, Excl. Tampa,
792 Marion, 049 Orange, Orlando, 090 Orange, Excl. Orlando, 042 Pinellas, Coastal, 046 Pinellas, St. Petersburg,
081 Pinellas, Remainder, 050 Polk, and 512 Seminole.
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PRESUMED FACTOR
State Farm’s rate filing8 effective 1/1/2006 for new business (3/1/2006 for renewal business)
displayed non-catastrophe paid sinkhole losses divided by earned premium by territory for 2000
through 2004. Below are the territories with sinkhole losses representing greater than 20 percent
of the premium earned:
Sinkhole Loss to Earned
Territory
County
Premium Ratio
25
Pasco, Coastal
22
Hernando, Coastal
81%
23
Hernando, Remainder
67%
26
Pasco, Remainder
52%
43
Citrus, Coastal
24%
46
Hillsborough, Excl. Tampa
23%
15
Pinellas, Excl. St. Petersburg
23%
44
Citrus, Remainder
22%
137%
DISTRIBUTION AND USE
Deloitte Consulting understands that records or data produced by Deloitte Consulting in
response to this engagement are subject to applicable public records law(s). OIR personnel are
available to respond to any questions with respect to this report. Deloitte Consulting will direct
all third party requests for such records to the OIR.
RELIANCE AND LIMITATIONS
Estimates of the presumed factor by Section are based on background information, publicly
available information, phone interviews, exposure data and loss data provided by the OIR,
Citizens and State Farm. A specific audit of the data and background information is beyond the
8
FL OIR filing reference number 05-09694 is available from the Office of Insurance Regulation I-File Workflow
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PRESUMED FACTOR
scope of this project. We have conducted such reasonableness tests of the data as we felt
appropriate. In all other respects, we have relied without audit or verification on the data and
background information provided.
Any assumptions, adjustments or modifications made by
Deloitte Consulting to the data will be documented in detail throughout the remainder of this
report.
In our opinion, the analysis presented herein for the OIR provides presumed factors by Section
based on accepted actuarial standards and principles.
In estimating the presumed factor by Section, we have assumed that historical trends, adjusted
for the impact, if any, of the provisions of Chapter Law 2006-12 (SB 1980) related to sinkhole
losses and Sections 17, 18, 19, 20, and 21 of Chapter Law 2005-11, can be used to predict future
losses. The estimates make no provision for extraordinary future emergence of new types of
losses not sufficiently represented in the historical information we reviewed or which are not yet
quantifiable. We have applied what we feel are reasonable procedures in our analysis.
However, due to the volatility of the loss exposures reviewed and the limited amount of
historical data, no assurance can be offered that future costs or savings will emerge according to
any estimates contained in this report.
System Forms & Rates Search Page web site (http://www.fldfs.com/edms).
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PRESUMED FACTOR
PRESUMED FACTOR FINDING
In accordance with Section 40 of the bill, Deloitte Consulting has estimated the following overall
presumed factor which should be applied to each residential property insurer’s annual estimate
of incurred loss and loss adjustment expenses (LAE) related to sinkhole claims in the State of
Florida:
Presumed Factor: 9.6%
As will be discussed below in greater detail, we believe it is not possible at this point in time to
actuarially determine the presumed factor for all the impacts of the 2005 and 2006 changes.
It is our professional judgment that we do not have the appropriate and comprehensive data
necessary to calculate the sinkhole presumed factor for a number of these changes. However,
over the next 18 to 24 months as insurance companies collect additional sinkhole data reflecting
the majority of the law changes, we believe it is likely that savings could emerge as a result of
the neutral evaluation process, the neutral evaluator’s decision being admitted as evidence,
payment being made directly to the contractor, reporting to the county clerk, and other important
features of the law changes that have not been captured in our 9.6% presumed factor.
It is also important to note that the level of savings above the 9.6% presumed factor will not be
known until insurance companies have a chance to experience the neutral evaluation process,
understand how judges and juries will react to the neutral evaluator’s report, and perform
actuarial analysis on future sinkhole claim activity. Since the neutral evaluation process has not
been implemented, no information is available on the overall cost of the process because the
scope of the neutral evaluation process and the scope of the neutral evaluator’s role are not
delineated in the statute. We presume once these issues are addressed by the rules adopted by
Department of Financial Services (DFS), insurance companies will be in a better position to
estimate the impact of the law changes.
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PRESUMED FACTOR
II. PRESUMED FACTOR BY SECTION
The documentation for each Section is laid out as follows:
•
Section number and title;
•
Noteworthy additions;
•
Noteworthy deletions;
•
Commentary; and
•
Selected impact.
Our additions, deletions and commentary have been focused specifically on areas of the
provisions of Chapter Law 2006-12 (SB 1980) related to sinkhole losses and Sections 17, 18, 19,
20, and 21 of Chapter Law 2005-11 that we feel are important in the determination of the
presumed factor. There are a number of other additions and deletions that we have not
commented on in each Section. The purpose of this section of our report is not to reiterate every
change, but to focus the reader’s attention on additions and deletions that we consider relevant to
the work we have been asked to perform.
A complete copy of the provisions of Chapter Law 2006-12 (SB 1980) related to sinkhole losses
and Sections 17, 18, 19, 20, and 21 of Chapter Law 2005-11 including deletions, modifications
and additions can be obtained from the web site www.myflorida.com under “find an agency” or
by directly accessing the web site www.leg.state.fl.us.
The following Section by Section documentation assumes the reader has thoroughly read
the provisions of Chapter Law 2006-12 (SB 1980) related to sinkhole losses and Sections 17,
18, 19, 20, and 21 of Chapter Law 2005-11 with coding marking deletions and additions.
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PRESUMED FACTOR
Chapter Law 2005-111
Section 17 – Sinkhole Insurance; Definitions
NOTEWORTHY ADDITIONS:
“(a) “Sinkhole” means a landform created by subsidence of soil, sediment, or rock as
underlying strata are dissolved by ground water. A sinkhole may form by collapse into
subterranean voids created by dissolution of limestone or dolostone or by subsidence as these
strata are dissolved.”
“(d) “Engineer” means a person, as defined in s. 471.005, who has a bachelor degree or
higher in engineering with a specialty in the geotechnical engineering field. An engineer must
have geotechnical experience and expertise in the identification of sinkhole activity as well as
other potential causes of damage to the structure.”
“(e) “Professional geologist” means a person, as defined by s. 492.102, who has a
bachelor degree or higher in geology or related earth science with expertise in the geology of
Florida. A professional geologist must have geological experience and expertise in the
identification of sinkhole activity as well as other potential geologic causes of damage to the
structure.”
NOTEWORTHY DELETIONS:
NONE
COMMENTARY:
Section 17 improved the definition of sinkhole, engineer and professional geologist. Clearer
definitions, combined with the uniform standards for testing sinkholes discussed in Section 19
help to standardize the claim settlement process. Through our discussions, we were informed
that denials were issued regularly in cases where conclusive evidence existed that the source of
the damage was something other than a sinkhole (e.g., leaking pipes, collapsed underground
septic tank).
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PRESUMED FACTOR
However, based on our discussions with interested parties, it is still believed that a clearer
definition of the term “sinkhole” is needed. Currently, there are a number of sinkhole claims
being paid that some would argue are not truly sinkhole claims. The typical sinkhole claim does
not arise from a “cover collapse” sinkhole where the entire house is suddenly swallowed by the
ground. They usually develop from a “cover subsidence” sinkhole where the ground slowly
subsides and the property is damaged over a period of time. The latter type of sinkhole claim is
not as easy to identify and distinguish from standard non-sinkhole related wear and tear claims
which are not covered.
Although discussed in greater detail in Section IV - Observations, we believe it is not possible at
this point in time to actuarially determine the savings from Section 17. It is our professional
judgment that we do not have the appropriate or comprehensive data necessary to calculate a
sinkhole presumed factor other than 0.0% for this section. If data were available, we believe the
savings from this section would be minimal.
SELECTED IMPACT:
De Minimis Future Savings
Section 18 – Database of Information Relating to Sinkholes; the
Department of Financial Services and the Department of
Environmental Protection
NOTEWORTHY ADDITIONS:
“(2) The Department of Financial Services, including the employee of the Division of
Consumer Services designated as the primary contact for consumers on issues relating to
sinkholes, and the Office of the Insurance Consumer Advocate shall consult with the Florida
Geological Survey and the Department of Environmental Protection to implement a statewide
database of sinkholes and related activity in the state.”
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PRESUMED FACTOR
NOTEWORTHY DELETIONS:
COMMENTARY:
NONE
NONE
SELECTED IMPACT:
0.0%
Section 19 – Standards for Investigation of Sinkhole Claims by
Insurers; Nonrenewals
NOTEWORTHY ADDITIONS:
“(2) Following the insurer's initial inspection, the insurer shall engage an engineer or a
professional geologist to conduct testing as provided in s. 627.7072 to determine the cause of the
loss within a reasonable professional probability and issue a report as provided in s. 627.7073, if:
(a) The insurer is unable to identify a valid cause of the damage or discovers damage to
the structure which is consistent with sinkhole loss; or
(b) The policyholder demands testing in accordance with this section or s. 627.7072.
(3) Following the initial inspection of the insured premises, the insurer shall provide
written notice to the policyholder disclosing the following information:
(a) What the insurer has determined to be the cause of damage, if the insurer has made
such a determination.
(b) A statement of the circumstances under which the insurer is required to engage an engineer
or a professional geologist to verify or eliminate sinkhole loss and to engage an engineer to make
recommendations regarding land and building stabilization and foundation repair.
(c) A statement regarding the right of the policyholder to request testing by an engineer
or a professional geologist and the circumstances under which the policyholder may demand
certain testing.
(4) If the insurer determines that there is no sinkhole loss, the insurer may deny the claim.
If the insurer denies the claim, without performing testing under s. 627.7072, the policyholder
may demand testing by the insurer under s. 627.7072. The policyholder's demand for testing
must
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PRESUMED FACTOR
be communicated to the insurer in writing after the policyholder's receipt of the insurer's denial
of the claim.
(5)(a) Subject to paragraph (b), if a sinkhole loss is verified, the insurer shall pay to
stabilize the land and building and repair the foundation in accordance with the
recommendations of the engineer as provided under s. 627.7073, and in consultation with the
policyholder, subject to the coverage and terms of the policy. The insurer shall pay for other
repairs to the structure and contents in accordance with the terms of the policy.
(b) The insurer may limit its payment to the actual cash value of the sinkhole loss, not
including underpinning or grouting or any other repair technique performed below the existing
foundation of the building, until the policyholder enters into a contract for the performance of
building stabilization or foundation repairs. After the policyholder enters into the contract, the
insurer shall pay the amounts necessary to begin and perform such repairs as the work is
performed and the expenses are incurred. The insurer may not require the policyholder to
advance payment for such repairs. If repair has begun and the engineer selected or approved by
the insurer determines that the repair cannot be completed within the policy limits, the insurer
must either complete the engineer's recommended repair or tender the policy limits to the
policyholder without a reduction for the repair expenses incurred.
(6) Except as provided in subsection (7), the fees and costs of the engineer or the
professional geologist shall be paid by the insurer.”
NOTEWORTHY DELETIONS:
Removal of old minimum standards for investigation of sinkhole claims by insurers.
COMMENTARY:
Section 19 creates uniform standards for the testing of sinkhole claims. If the claim is initially
denied by the insurance company without performing testing under s. 627.7072, the policyholder
may demand testing under s. 627.7072 be performed by an engineer or professional geologist at
the insurance company’s expense.
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PRESUMED FACTOR
Although the establishment of uniform standards is often times viewed as a positive step,
initially insurers can incur higher costs as the standards are developed and confirmed with their
policyholders. Insurers may also incur higher costs going forward when engineers or
professional geologists are used in situations that used to be handled by experienced sinkhole
claim adjusters without professional designations. Additionally, insureds will push for the
meeting of minimum standards, which may result in higher costs than, would have been incurred
before the standards were in place.
Although discussed in greater detail in Section IV - Observations, we believe it is not possible at
this point in time to actuarially determine the costs from Section 19. It is our professional
judgment that we do not have the appropriate or comprehensive data necessary to calculate a
sinkhole presumed factor other than 0.0% for this section.
SELECTED IMPACT:
De Minimis Future Cost
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PRESUMED FACTOR
Section 20 – Testing Standards for Sinkholes
NOTEWORTHY ADDITIONS:
Added testing standards for the engineer and professional geologist.
NOTEWORTHY DELETIONS:
COMMENTARY:
NONE
NONE
SELECTED IMPACT:
NONE
Section 21 – Sinkhole Reports
NOTEWORTHY ADDITIONS:
“(a) Sinkhole loss is verified if, based upon tests performed in accordance with s.
627.7072, an engineer and a professional geologist issue a written report and certification
stating:
1. That the cause of the actual physical and structural damage is sinkhole activity within
a reasonable professional probability.
2. That the analyses conducted were of sufficient scope to identify sinkhole activity as
the cause of damage within a reasonable professional probability.
3. A description of the tests performed.
4. A recommendation by the engineer of methods for stabilizing the land and building
and for making repairs to the foundation.
(b) If sinkhole activity is eliminated as the cause of damage to the structure, the engineer
and professional geologist shall issue a written report and certification to the policyholder and
insurer stating:
1. That the cause of the damage is not sinkhole activity within a reasonable professional
probability.
2. That the analyses and tests conducted were of sufficient scope to eliminate sinkhole
activity as the cause of damage within a reasonable professional probability.
3. A statement of the cause of the damage within a reasonable professional probability.
4. A description of the tests performed.”
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PRESUMED FACTOR
NOTEWORTHY DELETIONS:
COMMENTARY:
Section 21 will likely increase insurance company costs related to the issuance of a written
report and certification by an engineer or professional geologist. Although larger insurers appear
to be addressing most of the above requirements, even before the passage of the law, the formal
requirements do increase costs in those situations where the insurer felt there was no need for
completing a written report in the past (e.g., collapsed septic tank was obvious cause of loss).
Although discussed in greater detail in Section IV - Observations, we believe it is not possible at
this point in time to actuarially determine the costs from Section 21. It is our professional
judgment that we do not have the appropriate or comprehensive data necessary to calculate a
sinkhole presumed factor other than 0.0% for this section.
SELECTED IMPACT:
De Minimis Future Cost
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PRESUMED FACTOR
Chapter Law 2006-12
Section 25 – Sinkhole Insurance; Definitions
NOTEWORTHY ADDITIONS:
“A policy for residential property insurance may include a deductible amount applicable to
sinkhole losses equal to 1 percent, 2 percent, 5 percent, or 10 percent of the policy dwelling
limits, with appropriate premium discounts offered with each deductible amount.”
NOTEWORTHY DELETIONS:
NONE
COMMENTARY:
Section 25 proposes 4 different deductible levels as a percent of the policy dwelling limits.
Assuming actuarial pricing with appropriate premium discounts offered for each deductible
option (i.e., premium credit equals expected losses eliminated by the deductible), deductibles
could ultimately lead to reduced loss adjustment expenses if the deductibles reduces policyholder
interest in pursuing sinkhole claims.
However, unlike the mandatory deductibles required by the catastrophe windstorm pool, the
current sinkhole law only states that insurers “may” offer deductibles. At this point in time, no
data is available to determine the impact of deductibles on loss adjustment expenses or the filing
of sinkhole claims. Given the level of policyholder uncertainty surrounding whether a claim
should be classified as a sinkhole claim or not, and the potential remediation costs that could be
involved, we believe it is likely that homeowners with deductibles would still require insurers to
utilize the services of a professional engineer and a professional geologist in determining the
cause of the actual physical and structural damage.
Although discussed in greater detail in Section IV - Observations, we believe it is not possible at
this point in time to actuarially determine the savings from Section 25. It is our professional
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PRESUMED FACTOR
judgment that we do not have the appropriate or comprehensive data necessary to calculate a
sinkhole presumed factor other than 0.0% for this section.
SELECTED IMPACT:
De Minimis Future Savings
Section 26 – Standards for Investigation of Sinkhole Claims by
Insurers; nonrenewals.
NOTEWORTHY ADDITIONS:
“Upon the insurer’s obtaining the written approval of the policyholder and any lien holder, the
insurer may make payment directly to the persons selected by the policyholder to perform the
land and building stabilization and foundation repairs. The decision by the insurer to make
payment to such persons does not hold the insurer liable for the work performed.”
NOTEWORTHY DELETIONS:
NONE
COMMENTARY:
Section 26 allows the insurer, with the written permission of the policyholder and lien holder, to
make payments directly to the persons selected to perform the land and building stabilization and
foundation repairs. This may reduce the chance that the policyholder will receive a direct
payment from the insurer and use all or a portion of the proceeds for purposes other than
repairing the home.
Although discussed in greater detail in Section IV - Observations, we believe it is not possible at
this point in time to actuarially determine the savings from Section 26. It is our professional
judgment that we do not have the appropriate or comprehensive data necessary to calculate a
sinkhole presumed factor other than 0.0% for this section
SELECTED IMPACT:
De Minimis Future Savings
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PRESUMED FACTOR
Section 27 – Testing Standards for Sinkholes
NOTEWORTHY ADDITIONS:
NONE
NOTEWORTHY DELETIONS:
NONE
COMMENTARY:
NONE
SELECTED IMPACT:
0.0%
Section 28 – Sinkhole Reports
NOTEWORTHY ADDITIONS:
“cause of distress to the property”
“including the legal description of the real property and the name of the property owner, with the
county clerk of court”
NOTEWORTHY DELETIONS:
“verification or elimination of a sinkhole loss”
“property appraiser”
COMMENTARY:
Section 28 now requires the professional engineer or professional geologist to state the cause of
distress to the property. Currently, these professionals can provide findings that may appear
vague and open to multiple interpretations (e.g., stating that a sinkhole may not be ruled out with
100 percent certainty).
In addition, a copy of the report and certification must be filed with the county clerk of court,
who shall record the report and certification. Information provided to the county clerk, unlike
information provided to the county appraiser, will show up on the title company search during
the title verification process. Title insurance assures a purchaser of real estate (and the lender)
that the seller has clear ownership – or title – to the property and can transfer it to the purchaser.
The title policy does not require that title problems be fixed, only that lenders or owners be
compensated in the event of a problem that is covered under the policy. Possible title defects
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PRESUMED FACTOR
include errors or omissions in deeds, forgery, mistakes in examining records, undisclosed or
missing heirs, and liens (e.g., for unpaid taxes, by contractors, etc.).
By making the process more transparent for title insurers, lenders and future home buyers,
homeowners selling their property with sinkhole issues may face a reduced selling price if they
are unable to prove that prior insurance company payments have been properly used to stabilize
the ground and repair the home.
Although discussed in greater detail in Section IV - Observations, we believe it is not possible at
this point in time to actuarially determine the savings from Section 28. It is our professional
judgment that we do not have the appropriate or comprehensive data necessary to calculate a
sinkhole presumed factor other than 0.0% for this section.
SELECTED IMPACT:
De Minimis Initial Savings, Potential Future Savings
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PRESUMED FACTOR
Section 29 – Alternative Procedure for Resolution of Disputed
Sinkhole Insurance Claims
NOTEWORTHY ADDITIONS:
“(3) Following receipt of the report provided under s.627.7073 or the denial of a claim
for a sinkhole loss, the insurer shall notify the policyholder of his or her right to participate in the
neutral evaluation program under this section.”
“(4) Neutral evaluation is nonbinding, but mandatory if requested by either party.”
“(6) The insurer shall pay the costs associated with the neutral evaluation.”
“(10) Evidence of an offer to settle a claim during the neutral evaluation process, as well
as any relevant conduct or statements made in negotiations concerning the offer to settle a claim,
is inadmissible to prove liability or absence of liability for the claim or its value, except as
provided in subsection (13).”
“(12) For matters that are not resolved by the parties at the conclusion of the neutral
evaluation, the neutral evaluator shall prepare a report stating that in his or her opinion the
sinkhole loss has been verified or eliminated and, if verified, the need for and estimated costs of
stabilizing the land and any covered structures or buildings and other appropriate remediation or
structural repairs.”
“(13) … The neutral evaluator’s written recommendation is admissible in any subsequent
action or proceeding relating to the claim or to the cause of action giving rise to the claims.”
“(14) If the neutral evaluator first verifies the existence of a sinkhole and, second,
recommends the need for and estimates costs of stabilizing the land and any covered structures
or buildings and other appropriate remediation or structural repairs, which costs exceed the
amount that the insurer has offered to pay the policyholder, the insurer is liable to the
policyholder for up to $2,500 in attorney’s fees for the attorney’s participation in the neutral
evaluation process.”
“(15) If the insurer timely agrees in writing to comply and timely complies with the
recommendation of the neutral evaluator, but the policyholder declines to resolve the matter in
accordance with the recommendation of the neutral evaluator pursuant to this section:
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PRESUMED FACTOR
(a) The insurer is not liable for extra-contractual damages related to a claim for a
sinkhole loss but only as related to the issues determined by the neutral evaluation process….
(b) The insurer is not liable for attorney’s fees under s.627.428 or other provisions of the
insurance code unless the policyholder obtains a judgment that is more favorable than the
recommendation of the neutral evaluator.”
NOTEWORTHY DELETIONS:
NONE
COMMENTARY:
Section 29 adds the option for either the policyholder or insurer to request a neutral evaluation
process (NEP) with DFS. A neutral evaluator, selected from a list of certified neutral evaluators,
determines the cause of damage to a property, assesses the extent of the damage and estimates
the cost of repairing the damage. The neutral evaluator prepares a report that will verify or
eliminate sinkhole as the cause of loss. The neutral evaluator’s report is allowed to be admitted
as evidence if the claim proceeds to litigation.
Page 34 and 35 of our report display the NEP in flow chart form. The following paragraphs
walk the reader through the NEP while identifying areas for future consideration.
Depending upon the successful implementation of the NEP, we believe there could be an
eventual reduction in the number of filed sinkhole claims.
Impact A: Plaintiff Attorney Involvement
Depending on successful implementation of the NEP, the impact on judges and juries of
neutral evaluator’s admissible report, and how well Section 29 limits the ability of a
policyholder to recover attorney’s fees in certain circumstances, the level of plaintiff attorney
involvement could change. For instance, plaintiff attorney involvement could diminish if
the neutral evaluator’s admissible report is relied upon heavily by judges and juries (i.e.,
truly treated as a neutral opinion). Plaintiff attorney involvement could also diminish if
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PRESUMED FACTOR
judgments favor insurance companies and the insurer is not liable for attorney fees under
s.627.428 F.S. If active plaintiff attorney recruitment of homeowners decreases due to
reduced insurance proceeds (e.g., removal of attorney sinkhole billboards and door to door
advertising), the number of filed sinkhole claims could decrease.
As is shown on page 34, the homeowner files a sinkhole claim with their insurance company.
Upon receipt of the sinkhole claim, the insurer inspects the insured’s premises to determine if
there has been physical damage to the structure which may be the result of sinkhole activity.
The inspection may vary from a simple physical inspection on claims that appear to be nonsinkhole claims, to more involved testing procedures such as deep boring which is used more
frequently on paid sinkhole claims.
If the insurer accepts the sinkhole claim, a report documenting the findings is provided and the
insured can agree or disagree with the repair estimate. If the insurer denies the sinkhole claim
(e.g., list cause of loss as settling, decay, soil settlement, etc.), the insured can agree or disagree
with the denial.
Impact B: Percentage of Sinkhole Claims Denied
According to the Florida State University study, northern regions of the state had the highest
denial rates with 100 percent of the claims being denied. In the central portion of the state,
claim denial rates varied from 56 percent to 88 percent of submitted claims. The report also
noted that nearly 50 percent of Florida counties have 100 percent denial rates.
At this point in time, we are unable to determine if the percentage of sinkhole claims denied
by insurance companies will change as a result of the NEP. However, depending on
successful implementation of the process and the impact on judges and juries of neutral
evaluator’s admissible report, two things could impact denial rates:
1) Insurers could become more comfortable with denying claims that were accepted in the
past based purely on cost concerns and their objective to reduce sinkhole exposure.
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PRESUMED FACTOR
2) Plaintiff attorney involvement in these types of claims could diminish, reducing the
number of unsupportable claims.
When the insurer denies the sinkhole claim and shares the consumer information pamphlet on
the NEP with the insured, the percentage of insureds who agree or disagree with the insurance
company’s denial may change.
Impact C: Percentage of Claims Insured Agrees With Denial
No information was available on the percentage of sinkhole claims where the insured agrees
with the insurance company’s denial. Therefore, we are unable to determine if the
percentage will change as a result of the NEP. However, it appears likely that the NEP will,
at the very least, encourage policyholders to consider pursuing their claims beyond the first
denial by the insurance company and to invoke the NEP because, among other things, (i) the
insurance company bears the full cost of paying for the NEP and therefore there is no
downside to the policyholder in invoking the NEP and (ii) the policyholder may feel more
comfortable invoking the NEP without the benefit (and attendant cost) of private counsel
because the Department is required to provide the policyholder with access to a consumer
affairs specialist for consultation.
On page 35, we display the start of the neutral evaluation process. For illustration purposes, we
have assumed that in situations where the insurer denied the claim without performing testing
under s. 627.7072, the insured would have demanded testing be performed under s.627.7072 by
the insurer before entering the NEP.
Impact D: Cost of NE Process
Since the NE process has not been implemented, no information is available on the overall
cost of the NE process to the insurance company because the scope of the neutral evaluation
process and the scope of the neutral evaluator’s role are not delineated in the statute. We
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PRESUMED FACTOR
presume those issues will be addressed by the rules adopted by the (DFS). It should be noted
that Section 29 requires the insurer pay all costs associated with the NE process.
In addition, the insurance company must provide a consumer information pamphlet on the
NE process to the insured and notify them of their right to participate in the NEP. These
changes will likely result in additional costs because of increased policyholder awareness.
Upon completion of the NEP, the neutral evaluator prepares a report verifying or eliminating the
sinkhole claim. The insured, at this point in time, can choose to accept the findings of the
neutral evaluator and settle the claim or proceed to litigation. Depending upon the successful
implementation of the NEP, we believe there could be three areas impacting sinkhole related
costs:
Impact E: Impact of Allowing NE’s Decision to be Admitted as Evidence
The purpose of the neutral evaluator is to provide verification as to the presence of a
sinkhole, the plan for remediation and estimate the cost to remediate. Because the neutral
evaluator’s report is admissible as evidence in any further legal action, the revisions to the
law will likely reduce the frequency of litigation.
-29-
PRESUMED FACTOR
Impact F: Impact of Bad Faith Changes
If the insurer agrees in writing with the neutral evaluator’s assessment and timely complies
with the recommendations, the insurer is no longer liable for extra-contractual damages
related to the sinkhole loss with respect to the issues determined by the neutral evaluation
process. However, we note that it is the position of Citizens that it is exempt from bad faith
liability due to the language of section 627.351(6)(i), which is part of its enabling statute. If
Citizens is, in fact, exempted from bad faith liability under its enabling statute, then the
changes to Section 29 eliminating bad faith liabilities under certain circumstances would
have minimal impact on Citizens. Given the number of policies that have moved from other
insurance companies to Citizens, the savings to insurance companies from this change would
likely be minimal. Unfortunately, we were unable to obtain credible information on the
percentage of sinkhole claim payments resulting from bad faith allegations made by
policyholders.
Impact G: Impact of Limited Fee Shifting
In Florida, the general rule is that each party pays its own attorneys' fees. This is known as
the "American Rule." In England, the loser always pays the winner's legal fees. There are
only two exceptions. First, a statute may make attorneys' fee available to a prevailing party
in a certain type of lawsuit. Second, a contractual provision may allow the prevailing party
to recover attorneys' fees.
With respect to suits between an insurance company and a policyholder, Florida law (section
627.428) requires that the insurance company pay reasonable attorneys' fees to a
policyholder in all lawsuits in which the policyholder prevails. Section 29 now provides that
the "insurer is not liable for attorney’s fees under s.627.428 or other provisions of the
insurance code unless the policyholder obtains a judgment that is more favorable than the
recommendation of the neutral evaluator.”
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PRESUMED FACTOR
Although Section 29 does not make a policyholder liable to pay an insurance company’s
fees, it does take away the right for the policyholder to recover attorneys’ fees in certain
circumstances. The significance of this change cannot be overstated. If the neutral evaluator
does not decide in favor of the policyholder (or does not give the policyholder everything she
or he wants), then the policyholder has a solid disincentive to go to court because the
policyholder can only recover attorney’s fees if the jury verdict exceeds the relief
recommended by the neutral evaluator.
Given the fact that the NEP is mandatory if requested by the insurance company or policyholder,
we believe that Section 29 will result in reduced plaintiff attorney involvement for three reasons.
First, in cases where the neutral evaluator determines the loss was not caused by a sinkhole, the
insurance company will have a greater likelihood of carrying its burden of proof at trial to
establish that the cause of loss was excluded as coverage. Secondly, the limited fee shifting
features of Section 29, combined with the admissibility of the neutral evaluators report, will
likely reduce plaintiff attorney involvement. Lastly, policyholders will be more aware that they
can proceed through the NEP without having to pay attorney fees. The following illustrates a
range of possible insurance company savings from Section 29 on plaintiff attorney fees
expressed as a percentage of sinkhole indemnity and LAE payments:
-31-
PRESUMED FACTOR
In order to determine the above range of savings, we assumed the following:
1. Loss adjustment expenses represent approximately 20% of indemnity dollars paid by
insurance companies based on our review of available industry data
2. Plaintiff attorney fees, which are included in the indemnity payments made by insurance
companies, represent approximately 30% of non plaintiff attorney fee indemnity
payments based on our legal review and consideration of Florida Rules of Professional
Conduct for Laywers - Rule 4-1.5 “Fees and Costs for Legal Services.”
3. A range of savings on plaintiff attorney fees from 25% to 75% of the current plaintiff
attorney fees paid by insurance companies based on our understanding of the changes
proposed by Section 29.
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PRESUMED FACTOR
At a minimum, we believe insurance companies will see a reduced expenditure on plaintiff
attorney fees of 25% driven by the assumptions discussed above. However, we believe the level
of expenditure on plaintiff attorney fees could decrease in excess of that level driven by reduced
plaintiff attorney interest and consumer awareness in situations where policyholders may ask
plaintiff attorney’s to charge hourly rates before the NEP, in order to avoid the 33 1/3 percent
fees on recoveries up to $1 million paid by insurance companies. Given the uncertainty in
selecting a number in this range of possible savings estimates, we have selected the average of
9.6% as the presumed factor for savings attributable to reduced plaintiff attorney fees.
We note that additional costs or savings may arise from this section. However, we believe it is
not possible at this point in time to actuarially determine the savings or costs from these other
items. It is our professional judgment that we do not have the appropriate or comprehensive data
necessary to calculate a sinkhole presumed factor other than 0.0% for these other items.
However, over the next 18 to 24 months as insurance companies and plaintiff attorneys have a
chance to experience the NEP, understand how judges and juries will react to the neutral
evaluator’s report and perform actuarial analysis on future sinkhole activity as claim data is
collected, we believe it is likely that additional costs or savings could emerge as a result of these
impacts.
SELECTED IMPACT:
9.6%, Potential Future Savings
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PRESUMED FACTOR
SECTION 40
"PRESUMED FACTOR (PF)" - SAVINGS FLOW
SECTION 29 - ALTERNATIVE PROCEDURE FOR RESOLUTION
Acceptance Of Claim
Sinkhole Cause Of Loss
Report Provided
NEUTRAL EVALUATION
PROCESS
SHEET 1
INSURED AGREES
WITH ESTIMATE
INSURED DISPUTES
REPAIR ESTIMATE
HOMEOWNER
FILES CLAIM
INSURER INSPECTS
INSURED'S PREMISES TO
DETERMINE IF THERE HAS
BEEN PHYSICAL DAMAGE
TO THE STRUCTURE WHICH
MAY BE THE RESULT
OF SINKHOLE ACTIVITY
B)
% of Sinkhole
Claims Denied
A)
INSURED AGREES
WITH DENIAL
C)
Plaintiff Attorney
Involvement
Before Claim Filed
% of Claims Insured
Agrees With Denial
Denial Of Claim
Sinkhole Not Cause Of Loss
- Potential Impact
*
* - If the insurer denied the claim without performing testing under s.627.7072, we have
assumed that the policyholder would demand testing be performed by the insurer under
s.627.7072 before pursuing neutral evaluation.
-34-
INSURED DISAGREES
WITH DENIAL
PRESUMED FACTOR
SECTION 40
"PRESUMED FACTOR (PF)" - SAVINGS FLOW
SECTION 29 - ALTERNATIVE PROCEDURE FOR RESOLUTION
NEUTRAL EVALUATION
PROCESS
SHEET 2
MOVE TO
LITIGATION
D)
Cost of NE
Process
E)
Impact of Allowing
NE's Decision to be
Admitted as Evidence
NEUTRAL
EVALUATION (NE)
REQUEST FILED
WITH OIR
NE PROCESS
F)
Impact of
Bad Faith Changes
G)
Insurer Shares
Consumer Information
Pamphlet on NE; Notifies
of Right to Participate in NE
Insurer Pays all Costs
Associated with the NE
Process
Department Maintains
List Of Certified
Neutral Evaluators
NE Prepares Report
Verifying or Eliminating
Sinkhole Claim
-35-
Impact of Limited
Fee Shifting
SETTLEMENT BASED
ON NE REPORT
CLAIM
CLOSED
PRESUMED FACTOR
III. PRESUMED FACTOR SUMMARY MATRIX
Chapter Law 2005-111
Section 17 – Sinkhole Insurance; Definitions.............................. 0.0%
Section 18 – Database of Information Relating to Sinkholes...... 0.0%
Section 19 – Standards for Investigation ..................................... 0.0%
Section 20 – Testing Standards for Sinkholes ............................. 0.0%
Section 21 – Sinkhole Reports..................................................... 0.0%
Chapter Law 2006-12
Section 25 – Sinkhole Insurance; Definitions.............................. 0.0%
Section 26 – Standards for Investigation ..................................... 0.0%
Section 27 – Testing Standards for Sinkholes ............................. 0.0%
Section 28 – Sinkhole Reports..................................................... 0.0%
Section 29 – Alternative Procedure for Resolution ..................... 9.6%
Overall Presumed Factor ............................................................. 9.6%
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PRESUMED FACTOR
IV. OBSERVATIONS
Observations
This section of the report addresses issues that may span multiple Sections or require a more
detailed discussion than presented above.
•
Actuarial Standards of Practice (ASOP)
In the American Academy of Actuaries “Introduction to the Actuarial Standards of
Practice”9, the document states:
“Actuaries are expected to take a good faith approach in applying ASOPs, exercising good
judgment and common sense; it would be inappropriate for any user of an ASOP to make a
strained interpretation of the provisions of the ASOP.
Actuaries should observe those ASOPs that are relevant to the task at hand; not all
ASOPs will apply. An ASOP should not be interpreted as having applicability beyond its
stated scope and purpose. Most, but not all, of the ASOPs are task-specific, dealing with
particular kinds of professional services performed by actuaries. A few ASOPs, however,
deal more broadly with particular aspects of many types of actuarial assignments (for
example, ASOP No. 23, Data Quality). Actuaries are responsible for identifying the
ASOPs that apply to the task at hand. The Academy’s Council on Professionalism
publishes advisory Applicability Guidelines to assist actuaries in identifying the ASOPs
that may be relevant.”
As defined in ASOP No. 23:
9
From the American Academy of Actuaries web site www.actuary.org.
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PRESUMED FACTOR
Appropriate Data - For purposes of data quality, data are appropriate if they are suitable
for the intended purpose of an analysis and relevant to the system or process being
analyzed.
Comprehensive Data - For purposes of data quality, data obtained from inventory or
sampling methods are comprehensive if they contain sufficient data elements or records
needed for the analysis.
ASOP No. 23 also notes:
“If, in the actuary’s professional judgment, it is not appropriate to perform a review of
the data, the actuary should disclose that the actuary has not done such a review and
should disclose any resulting limitation on the use of the actuarial work product.”
It is our professional judgment that we do not have the appropriate or comprehensive data
necessary to calculate a sinkhole presumed factor other than 0.0% for a number of the law
changes discussed above by section.
•
Ability to Calculate the Presumed Factor
We have calculated a presumed factor of 9.6% reflecting reduced expenditures on plaintiff
attorney fees in Section 29. However, we are unable to calculate a presumed factor as of
September 1, 2006 for a number of the law changes discussed above by section based on the
following:
Actuarial Standards of Practice
Appropriate and comprehensive data does not exist as of September 1, 2006.
-38-
PRESUMED FACTOR
Availability of Data
Citizens and State Farm did their best to provide us with sinkhole data during our July 11,
2006 through August 21, 2006 analysis period (see Background section of report).
Unfortunately, no individual claim level detail was available during the analysis period that
would help us estimate the impact of the 2005 and 2006 law changes. For example, the data
provided by the insurance companies does not include any credible sinkhole experience that
reflects the neutral evaluation process, trends on how judges and juries will react to the
neutral evaluator’s report, trends on the level of plaintiff attorney involvement, trends in
denial rates, the impact of deductibles, the impact of payments made directly to contractors,
the impact of certifications filed with the county clerk of court, etc.
It is our opinion that a sufficient amount of time has not passed since the 2005 and 2006 law
changes were passed to evaluate a number of the changes. However, over the next 18 to 24
months, as insurance companies collect additional sinkhole data, we do believe that savings
in excess of the presumed factor could emerge as a result of the neutral evaluation process,
the neutral evaluator’s decision being admitted as evidence, payment being made directly to
the contractor, reporting to the county clerk, and other important features of the law changes.
Insurance companies should reflect any savings in excess of the presumed factor in future
rate filings.
Uncertainty Regarding the Structure of Neutral Evaluation Process
Since the neutral evaluation process has not been implemented, no information is available
on the overall cost of the process because the scope of the neutral evaluation process and the
scope of the neutral evaluator’s role are not delineated in the statute. Once these issues are
addressed by DFS and rules they adopt, insurance companies will be in a better position to
estimate the impact of the law changes.
-39-
PRESUMED FACTOR
Dramatic increase in the number of sinkhole claims
As noted in the Background section, Citizens’ sinkhole loss experience has deteriorated from
just 9 claims reported in 2002 to 632 claims in 2005. State Farm’s loss experience has
deteriorated from just 6 claims in 1994 to in excess of 400 claims in 2002, 2003 and 2004.
It was noted in our interviews that the rise in claims is likely correlated with the dramatic
increase in policyholder awareness of “sinkholes” driven by attorney advertising (e.g., door
to door pamphlets, billboards, internet web sites) and “word of mouth” about insurance
company payments.
The significant upswing in claims makes it difficult to use the historical data for estimating
the impact of the 2005 and 2006 law changes. With claims jumping from 9 claims reported
in 2002 to 632 claims in just four years, the Citizen’s data lacks stability and credibility.
Although State Farm has a few more years of data, their data exhibits the same challenges
from a stability and credibility perspective.
•
Application of the Presumed Factor
The presumed factor should be applied to each residential property insurer’s annual estimate
of incurred loss and loss adjustment related sinkhole claims in the state of Florida.
Data provided by Citizens shows that 95 percent of all sinkhole claims and 98 percent of all
sinkhole loss and loss adjustment expense have been reported in Pasco, Hernando, Pinellas
and Hillsborough counties. Given the heavy concentration of sinkholes in certain Florida
counties, we believe the presumed factor should be applied to each insurance company’s
actual sinkhole loss and loss adjustment expense data. Upon calculating the savings, the
insurance company could then express the savings as a one decimal place percentage to base
rates.
-40-
PRESUMED FACTOR
We don’t believe it is appropriate to develop a presumed factor expressed in the form of a
one decimal place percentage adjustment to base rates that gets applied equally to all
counties. This approach would overstate the savings for counties with no sinkhole exposure
(e.g., northern counties) and understate the savings for counties with significant sinkhole
exposure (e.g., sinkhole alley).
•
Data gathering
In order for insurance companies to analyze any savings that could emerge in excess of the
presumed factor, insurers must monitor and track sinkhole loss and loss adjustment expense.
For insurers not tracking sinkhole related information, it would be important to begin
separately coding and tracking sinkhole losses.
We also recognize that some insurance companies may have little or no credible sinkhole
data for purpose of calculating future savings. In these situations, the company may need to
reach out to the OIR or review savings calculations filed by other insurance companies like
Citizens with more credible data.
•
Rate filing considerations
It is up to each insurance company with direct written premium in the State of Florida to
consider their own independent analysis and review of their book of business over the next
18 to 24 months in order to determine whether the presumed factor produces rates that are
excessive, inadequate, or unfairly discriminatory.
•
Constitutionality
The constitutionality of the new law does not appear to be an issue, although there is always
the possibility of legal challenges, including constitutional challenges, to new legislation.
Our report assumes that the provisions of the 2005 and 2006 law changes are valid as enacted
and that all provisions of the new legislation will be enforced by the courts.
-41-
PRESUMED FACTOR
•
Determining who will be the Neutral Evaluator
DFS is currently in the process of developing and maintaining a list of certified neutral
evaluators. We have not reviewed or discussed the process behind how the neutral
evaluators are selected.
•
Valid Claims
We have not investigated or attempted to determine the percentage of sinkhole claims in the
data we received that have been classified by some individuals as fraudulent claims.
However, we understand that the significant spike in the number of sinkhole claim payments
since 2002 likely includes a number of sinkhole payments that may not be true sinkhole
claims.
Based on our interviews, a majority of the sinkhole claims in Pasco County come from
housing developments that were built over thirty years ago. Less stringent building codes,
combined with less than adequate building construction by contractors and proactive
advertising by plaintiff attorneys, have resulted in some sinkhole payments that are actually
the result of settlement or wear and tear.
Lastly, given the cost of defending and settling sinkhole claims, some insurers have chosen
to pay policy limits on non sinkhole claims in order to avoid future exposure. Paying policy
limits allows the insurance company to cancel the homeowner’s policy.
•
Tracking Sinkhole Claims
Prudence needs to be taken when determining the applicability of a presumed factor to each
individual insurer’s sinkhole loss experience. Claims data for each insurer may be tracked
by either the first report of sinkhole claim or by the first verification of sinkhole activity.
The insurer must be careful in tracking all costs associated with claim from inception to
accurately track sinkhole loss adjustment expense properly. Additionally, any claim initially
-42-
PRESUMED FACTOR
reported as a sinkhole loss, and investigated as a sinkhole loss, whether a sinkhole is verified
or ruled out, the loss adjustment expense associated with the claim should be tracked as a
sinkhole.
•
Tendering Policy Limits
We note that when examining the percentage of sinkhole claims that have reached policy
limits, this percentage could vary significantly by insurer based on their individual claims
settlement practices. Most insurers have the ability to tender policy limits to a claimant in
order to have the option to non-renew the insured. This ability provides a negotiation point
to the insurer when settling claims. Some insurers may not use this method of negotiating
and therefore display a lower ratio of claims settling at policy limits. Since Citizens serves
as the insurer of last resort, tendering policy limits to have the option to non-renew is not
applicable. However, if the insured does not make the repairs, Citizens does not have to
insure the property.
•
Bad Faith
We observe that it is the position of Citizens that it is exempt from bad faith liability due to
the language of section 627.351(6)(i), which is part of its enabling statute. We express no
opinion on the meaning of the statute. We also note that no court in Florida has yet ruled on
this issue. If Citizens is, in fact, exempted from bad faith liability under its enabling statute,
then the changes to Section 29 eliminating bad faith liabilities under certain circumstances
would have minimal impact on Citizens.
•
Sinkhole Testing Procedures
There are a number of testing procedures used to verify the existence of sinkholes. These
procedures include shallow boring, deep boring, ground penetrating radar, physical
inspections, penotrometer probes, moisture testing, electro-resistivity testing and floor slab
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surveys.10 Currently, shallow boring is more commonly used with denied claims, whereas
deep boring is used more frequently for paid claims. During the course of our analysis, we
were unable to determine whether the costs of these procedures or the level of utilization will
change as a result of the 2005 and 2006 law changes. In addition, we make no opinion on the
usefulness or reliability of these procedures in verifying the existence of sinkholes.
•
Sinkhole Definition
Most residential insurance policies in Florida exclude coverage for losses caused by "earth
movement," which includes earthquakes, tremors, landslides, mine subsidence, earth sinking,
earth rising, and other natural events. "Sinkhole activity" is expressly excluded from the
definition of earth movement and losses caused by sinkhole activity are required by statute to
be covered. But there is concern that, unless the definition of sinkhole activity is clear and
unambiguous, there may be a tendency for courts to find coverage that otherwise does not
exist because the insurer is unable definitively to eliminate sinkhole activity (as opposed to
other earth movement) as the cause of the loss.
The 2005 law revised the definition "sinkhole activity" to make it more explicit. The new
definition is as follows: "Sinkhole activity" means settlement or systematic weakening of the
earth supporting ... property only when such settlement or systematic weakening results from
movement or raveling of soils, sediments, or rock materials into subterranean voids created
by the effect of water on limestone or similar rock formation."
It remains to be seen whether this definition will be sufficient to eliminate confusion about
whether a loss was caused by covered "sinkhole activity" as opposed to uncovered "earth
movement." In the event that neutral evaluators and courts continue to face difficulty in
determining, in essence, what losses were not caused by sinkhole activity, commentators
10
For a more detailed discussion of testing procedures and levels of use, please refer to the April 2005 Florida State
University report titled “Insurance Study of Sinkholes”
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have suggested that the Legislature consider further revisions to narrow the definition of
"sinkhole activity."
•
Competition
During our conversations, more than one individual pointed out that the 2005 and 2006 law
changes were partially motivated by the desire to increase competition and improve the
availability of homeowners coverage in sinkhole counties where rate increases have been
significant over the past few years. We were unable to determine whether the law changes
will increase competition.
•
Neutral Evaluator’s Role
It is unclear in Section 29 to what extent the neutral evaluator can conduct independent
testing especially in light of the provision that the insurance company has to pay all costs.
DFS adopted rules will have an impact on the insurance company’s future estimates of the
cost of neutral evaluation process.
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V. APPENDIX
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APPENDIX A – Homeowners Insurance 10111
•
Coverage A (Dwelling) applies to the structure you inhabit. This would cover the dwelling,
attached structures (such as a garage) and permanently installed property (such as wall-towall carpeting).
•
Coverage B (Other structures) applies to other structures on your property. This would cover
a tool shed or a garage that is not permanently attached to your home.
•
Coverage C (Personal property) applies to the content of the dwelling. This area would cover
your property anywhere in the world. There are dollar limits on specific items that you
should be aware of because if your property exceeds these amounts, or no amount is
specified, you should cover them for an agreed amount.
•
Coverage D (Loss of use) applies when the dwelling is uninhabitable due to a covered loss. It
would cover additional living expenses (those necessary to maintain a normal standard of
living) or fair rental value (income lost from renters).
•
Coverage E (Personal Liability, Bodily Injury and Property Damage) is similar to Personal
Property coverage. This covers you when you are on or off your premises and will cover you
when you are legally responsible for an act that causes damage to someone else's person or
property.
•
Coverage F (Medical Payments) covers medical expenses stemming from injuries that occur
to others while they are on your premises.
•
Limits of liability - For basic homeowners policies, a specific minimum amount of coverage
is required for each of the major property coverages, based on the primary amount of
insurance selected.
Coverage A (Dwelling) = Primary limit
Coverage B (Other Structures) = 10% of Coverage A limit
Coverage C (Personal Property) = 50% of Coverage A limit
Coverage D (Loss of use) = 20% of Coverage A limit12
11
12
For further detail, please refer to the Travelers Homeowners Insurance 101 web site (www.travelers.com)
Actual Coverage B, C and D limits may vary by insurance company
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APPENDIX B – Florida County Map1314
13
From U.S. Census Bureau web site http://quickfacts.census.gov/qfd/maps/florida_map.html
Please refer to the January 2006 Insurance Services Office, Inc. report titled “Territorial Boundaries for
Residential Coverages in Florida” for the development of a proposed standard rating territory plan to be used by all
property and casualty insurers for residential property insurance. The report displays detailed maps for each Florida
county. The report can be found at www.floir.com/LegislativeAffairs/2006_reports_studies.htm.
14
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“Sinkhole Alley” Counties15
15
County maps from http://fcit.usf.edu/florida/maps/countout/counties.htm.
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“Sinkhole Alley” Counties
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APPENDIX C – OIR Market Share Reports16
16
Provided by the Office of Insurance Regulation
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